One of Canada’s “Big Six” banks is declaring next year to be “The Year of The Hike.” National Bank of Canada (NBC) chief strategist (and poet-in-residence) Warren Lovely is calling the first interest rate hike in just a few months. He sees the Bank of Canada (BoC) making its hike in March, way ahead of schedule. Over the next year, the overnight rate is forecast to recoup much of the ground lost during the pandemic. However, Canada’s real estate bubble will prevent it from going much further. Since the country went all-in on housing, it can’t pursue more aggressive policies like healthier economies.
The Bank Of Canada Will Hike Rates In March
Canada is expected to wind up its overly easy monetary policy pretty fast. Next year, National Bank sees five full, 0.25 basis point (bp) hikes. The first will be in March, bringing the overnight rate to 0.50% about a month before the BoC forecast. The only other institution to call a hike that early is BMO. However, mounting inflation pressures might force others to adjust in the coming weeks.
The remaining four hikes to the BoC’s overnight rate are forecast throughout the year. The second and fourth quarters are expected to see one full 0.25 bp hike each. In the third quarter, they see two full hikes. Canadians should see the overnight rate at 1.50% in one year, 6x the current level. That’s going to be a significant change.
Canada’s Real Estate Bubble Will Prevent Rates From Rising Too Fast
In 2023, they don’t see much more happening due to Canada’s real estate bubble. The bank only sees one more rate hike, topping out the country at 1.75% — the lower bound for the neutral rate. A neutral rate is the level of interest where money is cheap enough to support full employment but high enough to control inflation. According to the BoC’s last estimate, the neutral rate for Canada is between 1.75% to 2.75%.
The reason NBC only sees the rate rising to the lower bound is “interest-sensitive demand in the economy.” It’s a friendly way of calling out Canada’s real estate bubble, which is now so big it weighs policy decisions. “We don’t see the BoC as wanting to crush one of the main drivers of Canadian economic activity,” said Warren.
National Bank sees interest rates rising earlier than most other forecasts but ending faster. For example, Scotiabank sees interest rates climbing in the second half of next year. However, they also see rates rising closer to the middle of the neutral range, ending hikes around 2.25% in 2023. A slower start but higher rise compared to the NBC forecast.
While National Bank’s forecast is lower, it’s higher than the current rate, and that’s going to throttle credit. The forecast is the same level before the recession began, which had slowed home sales. It wasn’t until the end of 2019 when the BoC began providing mortgage liquidity injections, that the market picked up.